2012’s Top Ten Lab Stories Predict More Challenges

The year’s list of important stories reveal how financial stress will intensify in coming years

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CEO SUMMARY: It’s been a year with more lows than highs, when viewed through the lens of THE DARK REPORT’S “Top Ten Lab Stories of 2012.” The end of the TC grandfather clause, new policies for prostate biopsy billing, and a dramatic 52% cut to 88305- TC fees were widely reported. But there was equally bad news for the clinical laboratory industry in other significant ways. The common link to many of these news stories is a reduction in what government and private health plans will pay for lab tests.

ON BALANCE, 2012 WAS NOT KIND to the laboratory industry. In particular, between Congress and federal healthcare agencies, new laws and several policy changes occurred.

Collectively, these actions are expected to be negative to the financial stability of the nation’s medical laboratory organizations. But that’s not the end of the bad news associated with the events of 2012.

In developing THE DARK REPORT’S “Top Ten Lab Stories for 2012,” there were few breaking news stories that represented good news for the nation’s clinical laboratories and anatomic pathology groups.

One obvious bright spot was the call, by the Institute of Medicine (IOM), for all healthcare providers to transform themselves into “continuous learning organizations.” This was the theme of a report the IOM issued in September titled “Best Care at Lower Cost: The Path to Continuously Learning Health Care in America.”

The IOM urges all providers to proactively go outside healthcare to identify technologies and innovations that can improve patient outcomes while lowering the cost of care. THE DARK REPORT selected this as the number one news story for 2012 because it represents a positive call for providers—including clinical labs—to become nimble at using Lean, Six Sigma, and the other methods of quality management.

However, there is little good news to be found within the remaining “Top Ten Lab Stories for 2012.” One example is news story number two on our list. 2012 is the year that private payers intensified their own war on what they deem to be unwarranted high costs for clinical laboratory testing. These payers are targeting small independent lab companies, hospital lab outreach programs, and community hospital-based pathology groups. Payers are actively working to exclude them from managed care contracts and approved provider networks. (See page 5.)

Although the efforts of payers to narrow their provider networks is a develop- ment that favors the largest national laboratory companies, 2012 delivered plenty of bad news for the giants of the lab industry. Story number five is the slowing of organic growth at the nation’s two largest public lab companies.

Another provocative development that surfaced during 2012 was the publication of a study that looked at the feasibility of a national competitive bidding program for Medicare Part B Clinical Laboratory Testing. This is not an auspicious portent for the two blood brothers, should Medicare officials take action based on the findings of this study. That’s because any price reduction resulting from a national competitive bidding program would decrease the money these labs currently get from Medicare fee-for-service pricing.

Rapid Changes In Market

Other stories on our top ten list for 2012 include new laws and new regulatory policies. Each of these have been widely-reported due to the expectation that a large number of clinical labs and pathology groups will see a direct and negative financial impact.

Thus, story number four deals with the end of the TC grandfather clause. Congress, in its February bill to effect a temporary fix to the sustainable growth rate problem, took the money saved from allowing the TC grandfather clause to expire as of June 30, 2012. In the same bill, Congress also reduced Medicare Part B Clinical Lab fees by 2%.

On the regulatory front, there were equally significant events. One Medicare carrier’s new prostate biopsy policy caught the entire pathology profession by surprise. Just months later, the Medicare program released the 2013 Physician Fee Schedule that included a 52% reduction in the technical component for CPT 88305.

Lab Deficiencies Identified

At a more strategic level, several small hospitals closed during 2012 as a result of serious CLIA deficiencies identified during inspections by state regulators. This is evidence that a day of reckoning is arriving. (See TDR, March 12, 2012.)

Many more small hospitals are at the brink of financial crisis due to years of declining reimbursement. That bill is now coming due and a hospital’s laboratory is one of the first clinical services where deficiencies associated with inadequate hospital budgets becomes visible.

Staying with the big picture, the list of top ten lab industry stories for 2012 provides powerful evidence that the entire lab testing profession is about to undergo years of severe financial stress. It is neither accident nor coincidence that both government health programs and private health insurers enacted severe policies that have in common the goal of reducing what is spent on lab testing services.

The money has run out, particularly at the federal level. To make it from one fiscal year to the next, both legislators and regulators will be squeezing dollars from any and every source they can find.

This is one important message to be gleaned from a study of THE DARK REPORT’S “Top Ten Lab Stories for 2012.” It would be a strategic mistake not to study the most significant events of the year as a way to understand the evolutionary forces now reshaping healthcare as we have known it.

Top Ten Laboratory Stories of 2012

1.  Institute of Medicine Issues Call For Culture of “Continuous Learning”

HEALTHCARE EXPERTS say that the Institute of Medicine’s (IOM) latest report and call to action may be every bit as significant as the IOM’s “To Err Is Human” was in 2009.

The IOM is calling on all healthcare organizations to adopt a culture of “continuous learning.” It directs healthcare administrators to become proactive about identifying innovations within other industries, then be swift about adopting them in ways that improve both workflow and patient outcomes.

This new report is titled “Best Care at Lower Cost: The Path to Continuously Learning Health Care in America.” It was issued in September by the IOM.

In the words of the IOM, “Americans would be better served by a more nimble healthcare system that is consistently reliable and that constantly, systematically, and seamlessly improves… In short the country needs healthcare that learns by avoiding past mistakes and by adopting newfound successes.”

This is a clear and unmistakable message. As the American healthcare system moves toward value-based reimbursement, all providers—including clinical laboratories and anatomic pathology groups—will need to develop organizational cultures that embrace continuous improvement. This means more use of Lean, Six Sigma, and quality management systems (QMS).

 

Top Ten Laboratory Stories of 2012

2.  Payers Get Serious About Cutting What They Spend on Lab Testing

FOR MANY REASONS, THIS WAS THE YEAR that some of the nation’s largest health insurers took aggressive actions to exclude many regional and local laboratories as network providers.

Their goal is to significantly reduce what they spend on laboratory testing services. Too often, this means payers look for ways to exclude smaller independent laboratory companies, hospital lab outreach programs, and local pathology groups from their provider networks.

Aetna, Inc.’s efforts to significantly cut back on the number of clinical labs and pathology groups holding provider contracts is probably the best-known example of this trend. There are reports that Aetna has effectively purged as many as 400 regional and local laboratory providers from the various provider networks it operates throughout the United States.

Similarly, the Blue Cross Blue Shield Association (BCBSA) enacted new requirements for its Blue Card program. Several lab industry groups recognized these changes as designed to exclude large numbers of small lab providers from having access to Blue Card patients.

By no means is this trend limited to just Aetna and the Blues. Other health insurers are taking similar actions that make it tougher—if not impossible—for small labs to be an in-network provider.

 

Top Ten Laboratory Stories of 2012

3. 8305 and Prostate Biopsy Policies Send Message to Pathology Labs

EFFORTS BY MEDICARE OFFICIALS to reduce reimbursement for anatomic pathology services is a major news story for this year. Regarding CPT code 88305, one of the most commonly used codes in pathology labs, the bad news came in two forms.

First, in August, Palmetto GBA, the nation’s largest Medicare contractor, issued a new policy for Part B prostate biopsies that restricted what labs could bill for these claims.

The effect of this policy was a cap on reimbursement for a 12-core prostate biopsy using code 88305 at about 47% of its former level. However, as of press time, it appears that Palmetto’s policy may not stand, for several important reasons.

The second attack on 88305 commences on January 1, 2013. On that day, the Medicare program will cut payment for labs billing the technical component on the 88305 CPT code by 52%, while raising the fee for the professional component by 2%.

It is possible that both reimbursement policy changes can be revised through effective lobbying by the laboratory industry. That would be good news.

However, such industry wins would not change the significance of this Top Ten Lab Industry Story for 2012. These actions by Medicare carriers and federal regulators are a direct result of growing financial pressure. That is why more budget cuts can be expected.

 

Top Ten Laboratory Stories of 2012

4. End of TC Grandfather Triggers New Dynamics in Pathology Market

IN AN EXAMPLE of “robbing Peter to pay Paul,” last February Congress eliminated what labs call the pathology “TC grandfather provision.” This was done to find the funds necessary to pay for the temporary fix to the physician Sustainable Growth Rate formula.

Effective July 1, 2012, independent laboratories could no longer bill Medicare directly for payment for the technical component (TC) of certain surgical pathology services done for Medicare Part A patients. Instead, pathologists had to bill hospitals for these services.

What is significant about this story is that the pathology profession had managed, for almost two decades, to gain extensions to the TC grandfather provision. Now, because of the federal government’s desperate fiscal problems, Congress is grabbing any source of funds it can to patch the financial crisis of the moment.

This situation is exacerbated by the continuing federal budget deficit that is at record high levels. It means that Congress has a shrinking number of options as it attempts to plug different budget gaps.

For the anatomic pathology profession, we are entering what experts predict will be a grim time. Congress will aggressively pursue every opportunity to cut spending. It is reasonable to expect deeper and more painful cuts to reimbursement for lab testing.

 

Top Ten Laboratory Stories of 2012

5. Growth Slows for Nation’s Two Largest Public Lab Companies

SUSTAINING ADEQUATE LEVELS OF ORGANIC GROWTH in revenue and specimen volume has been an elusive goal for the nation’s two largest public lab companies in recent years. Quarterly financial reports throughout 2012 showed the continuing nature of this challenge.

For the first nine months of 2012, Quest Diagnostics Incorporated reported a decline of 2.9% and 1.1% in revenue and patient requisitions, respectively, when compared to the same nine months of 2011.

For Laboratory Corporation of America, during the first nine months of 2012, there was 2.2% growth in revenue and an increase of 1.3% in patient requisitions, compared to the same period in 2011. Allowing for the contribution of acquisitions during this period, LabCorp executives noted that organic growth was positive for third quarter.

For almost 15 years, the two blood brothers have regularly posted rates of growth that pleased Wall Street investors. Much of this growth came from the strategy of acquiring other lab companies to gain their revenues and specimens.

But, with fewer opportunities to acquire clinical labs and pathology groups, the financial results for the first nine months of 2012 provide an indication that both national lab companies may need different business strategies if they are to perform to the expectations of shareholders and financial analysts.

 

Top Ten Laboratory Stories of 2012

6. California Labs Sue Health Insurers and Quest for Sherman Act Violations

NOVEMBER SAW THE FILING OF A PRIVATE LAWSUIT with the potential to establish powerful legal precedents in how clinical laboratory companies and health insurers may contract to do business with each other.

Defendants in this case are: Quest Diagnostics Incorporated, Aetna Inc., Blue Shield of California, and the Blue Cross and Blue Shield Association (BCBSA). They are accused of conspiring to monopolize and restrain competition for routine, molecular, and specialty testing services in California.

This lawsuit was filed in California in November. The plaintiffs are four independent laboratory companies: Hunter Laboratories LLC (Burlingame), Pacific Breast Pathology Medical Corporation (Novato), Rheumatology Diagnostics Laboratory Inc. (Los Angeles), and Surgical Pathology Associates (Los Gatos).

The key legal issues in this case center around allegations that the defendants acted to unreasonably restrain competition in violation of federal and California law and that these actions constitute unlawful, unfair, and/or fraudulent business practices under California law.

This is believed to be the first time that a private lawsuit has been filed that raises these specific claims as they pertain to the managed care contracting practices between large labs and big insurers. Thus, a favorable outcome for the plaintiffs could establish new legal precedents.

 

Top Ten Laboratory Stories of 2012

7.  Lab Deficiencies Cause Closure of Small and Rural Hospitals

DURING 2012, MANY SMALL HOSPITALS struggled financially. In some cases, in response to deteriorating cash flow, some of these hospitals failed to adequately fund their clinical laboratories.

The New York State Department of Health (NYSDOH) uncovered two examples of this problem during the past year. One hospital was shut down permanently while the other reopened and continues to operate.

In February, NYSDOH ordered a 30-day closure of the clinical laboratory at the 173-bed Peninsula Hospital Center in Queens, New York. In 2011, the hospital had filed a bankruptcy action. The closure order was issued after state inspectors found nine pages worth of deficiencies in the clinical lab. When the bankruptcy court did not okay a restructuring plan, the hospital closed permanently. (See TDR, March 12, 2012.)

Another lab closure order was issued in September to 37-bed E.J. Noble Hospital in Gouverneur, New York. NYSDOH officials found 14 deficiencies in the hospital’s clinical laboratory. Again, reports indicated the hospital had financial problems affecting the clinical lab. This hospital later reopened.

There are similar examples of poor laboratory compliance with CLIA requirements at other financially-strapped small hospitals. These are sentinel events that portend tougher times ahead for rural and small hospital laboratories.

 

Top Ten Laboratory Stories of 2012

8.  Lab Market Welcomes Real-Time Management Dashboard Software

ANY NUMBER OF VENDORS NOW OFFER clinical laboratories and pathology groups software solutions designed to deliver real-time information to managers and lab staff.

This is a fast-moving new development. It demonstrates that the nation’s more innovative clinical laboratories continue to seek ways to improve workflow and achieve greater productivity.

Further, use of real-time management dashboards is a logical progression for clinical laboratory operations. First came automation of the high volume core chemistry and hematology laboratory. As labs implemented automated solutions, they next began to purchase middleware solutions that help to further automate manual work flow activities. Examples of this are autoverification and managing the movement of specimens through the lab. Call this the second stage on the automation curve.

Today’s third stage of automation involves use of middleware solutions to more fully integrate all the information systems within the lab—from the lab information system (LIS) to the billing systems.

Call it the stage of “enterprise-wide solutions.” These products are laboratory-specific CRMs (customer relationship management) and are capable of giving lab managers continuous and real-time data about workflow in their laboratory, as well as customer service levels.

 

Top Ten Laboratory Stories of 2012

9.  CLIA PT Test Referral Issue Subject Of Newly-Enacted Federal Law

HAVING CONGRESS PASS a legislative fix for one part of the CLIA statute was a significant victory for the laboratory medicine profession this year.

It was December 4, 2012, when President Obama signed into law the Taking Essential Steps for Testing (TEST) Act of 2012. This was legislation intended to provide clarity to the Centers for Medicare and Medicaid Services (CMS) in how to interpret the language of the Clinical Laboratory Improvement Amendments (CLIA) that pertain to the inadvertent referral of proficiency testing specimens.

What spurred Congress to act was the fact that nationally-respected laboratory organizations were being hit with severe penalties in response to incidents where lab staff had inadvertently referred a proficiency test (PT) specimen in violation of CLIA requirements.

This summer, CLIA officials sent a sanction letter to the laboratory at Ohio State University Wexner Medical Center (OSUWMC) in Columbus, Ohio. In response to the disclosure of inadvertent referral of PT specimens, OSUWMC was told that it would lose its CLIA license and its laboratory director would be barred from serving in this role at any lab for two years.

This and similar severe sanctions to other labs motivated Congress to pass the TEST Act in just four months!

 

Top Ten Laboratory Stories of 2012

10.  Is It Serious? National Competitive Bidding Study Published by Medicare

AS A CONCEPT, COMPETITIVE BIDDING for Medicare Part B Clinical Laboratory Testing Services is back again! This time around, the idea is to conduct a national competitive bidding program.

This is an important story. But it seems to have gone unnoticed by many in the clinical laboratory testing industry. The feasibility of conducting a national competitive bidding program was the subject of a study titled “The National Market for Medicare Clinical Laboratory Testing: Implications for Payment Reform.”

This was published last spring in the Medicare & Medicaid Research Review, a peer-reviewed journal published by the Centers for Medicare and Medicaid Services (CMS). The study was conducted by RTI International, Inc., of Research Triangle Park.

Authors of the study wrote “In this study, we conduct an empirical analysis of the national Medicare Part B FFS [fee for service] clinical laboratory market, which could inform future efforts to implement Medicare clinical laboratory competitive bidding or other payment reforms.” (Italics by THE DARK REPORT.)

RTI’s commission to produce a feasibility study of national competitive bidding shows that certain officials within the federal establishment continue to see this approach as a useful way to reduce what Medicare spends on lab testing.

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